Many expiring leases for office space in Central are expected to be renewed amid a lack of office space elsewhere. Photo: EPA

A limited supply of alternative office space and a narrowing gap between office rents charged in Central and other Hong Kong areas is making relocation from the core office market a steadily less attractive option.

As a result, many of the financial institutions that presently rent space in Central are expected to remain in their offices when leases come up for renewal, property analysts say.

"And since many of the expiring leases are expected to be renewed, rentals in Central will remain firm," said Simon Lo Wing-fai, director of the research and advisory department of property consultancy Colliers International.

As of August, net rentals in Central averaged HK$104 per square foot, compared with HK$56 to HK$57 per sq ft in Causeway Bay, and HK$40.50 per sq ft in Quarry Bay, Lo said. Central rents are some 10 per cent below last year's rents, when the average office rental was HK$116 per sq ft. But average rents in Causeway Bay and Quarry Bay are up from HK$54 and HK$40.60 per sq ft respectively, according to Colliers.

Even if companies wanted to decentralise, supply, especially on Hong Kong Island is limited, according to Lo.

The office vacancy rate in Quarry Bay is below 1 per cent and there is no significant vacant space in Causeway Bay, except in Hysan Place - where rents are more than HK$70 per sq ft.

As a result the decentralisation trend should slow, according to Lo.

Accountancy firm Ernst and Young, which was located at Two IFC, relocated to One Island East in Quarry Bay when its lease expired in January; and KPMG, which was located in Alexandra House, moved to Hysan Place in Causeway Bay when its lease expired in June.

Credit Suisse noted in a research report that most of the key office leases in Central expiring this year were renewed. These included BNP, which renewed its lease at Two IFC; and BASF China, which renewed its lease at Jardine House.

"There were not many options left," the report said.

In the past 12 months many foreign financial institutions that have been key tenants of Central office space, have downsized their operations. However, Chinese finance institutions have expanded giving support to the Central office market, according to Credit Suisse.

Data from the Securities and Futures Commission shows that as of September 24 the headcount of licensed staff in the top 100 foreign and Chinese financial institutions in Hong Kong was 7,657 and 2,493 respectively - down 7.3 per cent in the case of foreign institutions, and up 3.2 per cent in the case of Chinese institutions.

Of the 17 key foreign brokers, only four showed an increase in the number of licensees while the other 13 had reduced the licensees in the past 12 months, according to Credit Suisse. Chinese brokers, however, have mostly expanded.

Demand for office space from mainland tenants is not limited to financial institutions.

Rongbaozhai, a Beijing auction house recently leased an office unit on the third floor at Central's Cheung Kong Center.

An easing of demand for office space this year provided opportunities for Chinese firms to find space in Central, Credit Suisse said.

"We believe many of the offices have been set up for the long term and are financially supported by their parent companies on the mainland," it said.

"Their demand for office space should be resilient despite the short-term softness in the Chinese economy."

However, Alan Lok, executive director at agency CBRE, said office rents in Central were softening as demand for office space remained weak.

This article appeared in the South China Morning Post print edition as Firms to stay put as rent gap closes